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What would the worst scenario in fiscal cliff issue materialising means for gold, silver, crude oil and copper on the MCX.

08 Nov 2012

By Rakesh Neelakandan
The US is facing another potential recession if an agreement between President Obama and Congress regarding the fiscal cliff issue is not attained well in time before January; now one would say that is barely two months away.

Before one elaborates on how the fiscal cliff issue –the issue in itself and the slew of arguments-in-waiting that would be traded for and against spending cuts and taxes--would affect commodities, one should say what the issue is about.

The Origins

When the debt-ceiling debate in US was at its height pumping up pressure to stratospheric levels, President Barack Hussein Obama, a member of Democratic Party and various Republican Congressmen led by John Boehner agreed to a new deal or law in August 2011.

As per this law, a Joint Select Committee aka 'Supercommittee' would come up with a bipartisan legislation by late November 2011 that would decrease the government's budget deficit by $1.2 trillion in a span of 10 years.

Now, if the Supercommittee failed in its endeavour, which it did, the law directed automatic initiation of across-the-board cuts that would be split evenly between defence and domestic spending, which would begin January 2, 2013. The cuts amount to $600 billion.

The Bush-era tax cuts of 2010 that was extended for another 2 years by another law --Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010—would also expire by the date when fiscal cliff issue would reach a crescendo aggravating the crisis.

Add to this the imposing of Affordable Care Act on new taxes on families who are making more than $250,000 a year ($200,000 for individuals) starting at the same time.

About.com says with some clarity:

"Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect."

Unless the President and Lawmakers find some way out and agree to some austerity or discrete tax hikes or a mix of both and drive away from the cliff, it is a financial Armageddon that would bump into us.

Now, what would this mean for gold, silver, crude oil and copper on the MCX.

MCX Bullion and a fiscal cliff issue in mess

Gold and silver prices have always thrived on uncertainty. If US goes off the fiscal cliff, there exists no doubt that dollar would weaken by a huge measure thereby triggering a rally in bullion: gold and silver.

MCX gold prices would climb to Rs.33000 levels and silver to Rs.65000 levels, according to Amrita Mashar, Manager-Research, Commodity Online.

MCX Metals-Energy and a fiscal cliff issue in mess

The Congressional Budget Office has predicted a recession if fiscal cliff issue is not properly addressed. Clearly that would take crude oil prices downhill. Base metals too would take a beating.

Crude oil on the MCX can come down to Rs.4400 levels even as MCX Copper could come down to Rs.400. “if it breaks the 400 mark, then the next stop would be Rs.388”, Amrita added.

One should also watch out for volatility taking over the markets in the run up to January as fiscal cliff issue would spark debates; arguments and counter arguments that would swing the markets to and fro; widely and wildly. (rakesh@commodityonline.com)

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